Professional athletes seem to have it all. They get to play sports for a living, travel around the country, spend lots of money, live in big homes, drive fancy cars, and gain notoriety and fame. The lifestyle of a professional athlete though can be quite taxing, literally. Professional athletes must navigate a complex scheme of state and local tax laws, and are subject to taxation in nearly every destination in which they perform over the course of a season. While there is a widespread perception that athletes are subject to a unique set of taxes specially designed for athletes, often referred to as “jock taxes”, that is not entirely accurate.

Many of the taxes that professional athletes are subject to are in fact applicable to all taxpayers. Nonetheless, professional athletes are arguably more heavily impacted by multistate taxes than taxpayers of virtually any other profession. This is a result of several factors—athletes frequently travel to perform in numerous taxing jurisdictions, are highly compensated, and are easily identifiable when they perform in a particular taxing jurisdiction. This is part one of a three-part series designed to raise awareness of the state and local tax issues surrounding professional athletes.

This article will highlight the issue of determining tax domicile for professional athletes. Subsequent articles will discuss apportionment methods and the determination of income, resident state tax credits, deductibility of expenses, and tax compliance considerations.

Domicile: Home is where the heart is

The state in which a taxpayer is domiciled is the state the taxpayer will file a resident tax return, and pay tax on all income earned. As the U.S. Supreme Court eloquently stated: “[D]omicile in itself establishes a basis for taxation. Enjoyment of the privileges of residence within the state, and the attendant right to invoke the protection of its laws, are inseparable from the responsibility for sharing the costs of government.” Lawrence v. State Tax Comm’r, 286 U.S. 276, 279 (1932).

Determining an athlete’s resident state or domicile, though, is often a challenge and their domicile may vary from year to year depending on a number of factors. Athletes typically own multiple residences and often move during the course of a season due to where they are drafted, traded, and sign via free agency. It may not be uncommon for an athlete to be considered a resident of one state one year and a resident of another state the next, even though the athlete has maintained the same residences throughout this period of time. Nevertheless, a taxpayer may only be a resident of one state for tax purposes.

[A]n individual has only one domicile, which is generally the State with which he is currently most closely connected, but which may be a State with which he was closely connected in the past. Traditionally, an individual has been said to acquire a new domicile when he resides in a State with "the absence of any intention to live elsewhere," or with "the absence of any present intention of not residing permanently or indefinitely in' the new abode." The concept of domicile has typically been reserved for purposes that clearly require general recognition of a single State with which the individual, actually or presumptively, is most closely connected. Martinez v. Bynum, 461 U.S. 321, 340 (1983) (Marshall, J., dissenting) (internal citations omitted).

Domicile is generally determined by an intent to permanently establish a residence, and many states, such as Ohio and Minnesota, have established a bright line rule of spending a statutorily defined period of time in a state. While Minnesota and Ohio both have a similar 183-day rule to establish residency, the rules differ in their applicability. Ohio’s 183 contact period test results in a presumption of residence, while Minnesota’s 183-day rule is a bright line test. Illinois, on the other hand, determines domicile solely based on a subjective intent standard. See Illinois Section 100.3020 Resident (IITA Section 301) (d). The summer of 2014’s NBA offseason highlights the challenges athletes will encounter in determining their tax domicile.

To build the next super basketball team, the Cleveland Cavaliers have engaged in a variety of player transactions this summer. LeBron James signed with the Cavaliers as a free agent to bring his talents back to northeastern Ohio from Miami, Florida, and Andrew Wiggins, along with other assets, was shipped off to the land of 10,000 lakes in exchange for all-star Kevin Love. With all of these changes, each of these players is going to need a championship caliber tax professional to determine their tax domicile for 2014.

Andrew Wiggins is from Toronto, played basketball at the University of Kansas, was drafted by the Cleveland Cavaliers, and then traded to the Minnesota Timberwolves. Any one of these four places are potential tax domiciles for Mr. Wiggins, but Mr. Wiggins isn’t in Kansas anymore. If Mr. Wiggins intends to make Minnesota his home for a permanent or indefinite period of time, then Minnesota will likely be considered his tax domicile. However, if he maintains a home in Minnesota, but intends to make someplace else his permanent residence, then Mr. Wiggins will not be considered a Minnesota resident. He will have failed to meet the state’s 183-day rule for his 2014 tax year, and will have to pay tax only on income earned in Minnesota. Mr. Wiggins will be required to keep accurate records to verify that he spent more than 183 days out of state. Evidence considered to establish a domicile includes:

Location of residence or residences and the duration owned or rented

Address where mail is received

Location of employment and where wages are earned

Duration of a player contract

Investment in or management of a business

Charity work

Amount of time spent in state versus out the state (many states use a 183-day rule)

State where the athlete is registered to vote

State where the athlete’s drivers license is issued, vehicle registration or other licenses and permits

Where the athlete’s children attend school or qualify for in-state tuition

Membership in country clubs, social, or athletic organizations

LeBron James, on the other hand, has things much easier, and not just because he can now lob layup passes to Kevin Love and receive alley-oop passes from Kyrie Irving. LeBron James will either be considered to be domiciled in Ohio or Florida. Florida does not have an income tax. Therefore, a principal tax consideration for LeBron should be to shield as much of his income from being subject to Ohio income tax. However, it is not a positive factor that his Miami home is listed for sale. LeBron James may have waited till early July to make his “Decision Part II” for one very important reason: He will have less than 183 contact periods in Ohio (assuming of course that he did not have contact periods earlier this year in Ohio, nevertheless, it still illustrates the rule), to not be presumed domiciled in Ohio pursuant to O.R.C. § 5747.24. By not being considered an Ohio resident for 2014, LeBron has potential to save an enormous amount in Ohio income tax.